How to refinance a VA loan

The Department of Veterans Affairs (VA) offers mortgages to veterans, and in some situations, it’s beneficial for a service member to refinance or convert a conventional loan into a VA loan. In general, VA loans have higher approval rates than traditional loans. There’s no down payment or private mortgage insurance requirement, so most eligible veterans can qualify.

Refinancing a VA loan can have many benefits, including lower interest rates and the option to switch the type of loan, lower monthly payments and cash in on home equity. If you plan to refinance, there are some eligibility requirements and costs to understand.

Can you refinance a VA loan?

Qualifying veterans can refinance any existing mortgage into a VA loan. If you have a conventional loan, you could refinance with a VA lender. Alternatively, if you already have a VA loan, you can refinance with a different lender. However, there are some restrictions on when and how you can finance a VA loan.

For example, an interest rate reduction refinance loan, or IRRRL, can only be done if you have a current VA loan. In other words, you can’t use an IRRRL to refinance from a conventional loan into a VA loan. In addition, an IRRRL does not offer the opportunity to cash out any equity.

VA loan refinancing options

There are three main options for VA loan refinancing. The type best for your situation depends on many factors, like your current loan type, mortgage balance, home equity and the desired result. The different outcomes might be a different loan term length, lower payment, lower interest rate or cash-out equity.

VA cash-out refinance loans

A VA cash-out refinance allows you to take out cash from the equity in your home. Eligible veterans can do this to refinance from a conventional loan into a VA loan or from one VA loan to another.

There are three ways to refinance to a VA Loan.

The perk of a cash-out refinance is that you can refinance the entire amount of the loan, and between 90% to 100% of the equity can be cashed out at closing. You might also be able to lower your interest rate. Refinancing a VA loan for cash can be helpful if you need money to pay for schooling, debt, remodeling or other expenses.

Equity is when your house is worth more than the loan you have on it. For example, if you have a $250,000 mortgage and the property’s value is appraised at $300,000, then you have $50,000 in equity. Sometimes, you might be able to take the entire equity amount out in cash.

The underwriting process for a cash-out refinance is the same as for a typical mortgage — usually between 30 and 45 days. A full home appraisal and credit report are both required. This can be a negative if you need to close quickly.

VA streamline refinance (VA IRRRL)

A VA interest rate reduction refinance loan (VA IRRRL), sometimes called a “streamline refinance,” offers the opportunity for new loan terms that can provide you with an immediate financial benefit. To be eligible for an IRRRL, you must already have an existing VA loan.

This type of VA refinance is best if you are struggling with monthly payments or want to switch from an adjustable-rate mortgage (ARM) to a fixed-rate loan. A streamline refinance can also change the loan term, and if the term is extended, payments are likely to be lower. However, extending the loan term can also increase the amount you pay on the loan over time.

An IRRRL is generally used to get a lower interest rate, but it can also result in a higher interest rate if you are moving from an ARM to a fixed-rate loan, which usually has higher rates because the rate is stable.

One benefit of a streamline refinance is that it is easier and faster than a standard or cash-out VA refinance. It does not require an appraisal and income verification. Unlike other VA refinance options, you can sometimes streamline refinance a property you are renting out, as long as you can prove that the property was your primary residence at some point. It is important to check with individual lenders, as they do not all offer the option for a rental.

Conventional to VA refinance 

Eligible veterans can refinance a conventional loan into a VA loan. This includes those with Federal Housing Administration (FHA) loans. This type of refinancing is best suited for someone who does not have equity in their property or if they are concerned about property values.

Conventional refinance terms usually state that the owner must have at least 10% equity in a property to be eligible for a refinance. A standard VA refinance allows the refinance amount to be 100% of the value of the home, even if there is no equity built up.

For example, if your house is appraised at $150,000 and your loan balance is $150,000, then you would not qualify for a conventional refinance. Still, you would likely qualify to refinance your conventional mortgage into a VA loan.

VA loan refinance requirements

Refinancing a VA loan has eligibility requirements revolving around military service and financial information like credit score and debt-to-income ratio. Service requirements include, but are not limited to:

• Serving on active duty over 90 consecutive days during wartime or 181 days during peacetime
• Serving at least six years in the National Guard or Selected Reserve

Surviving spouses may also be eligible if their partner died in service or their death was caused by service-related disability and they have not remarried. You might not qualify if your discharge status is something other than honorable.

The VA does not set criteria for credit scores to qualify for a VA refinance. However, most lenders set some kind of minimum FICO credit score criteria. The VA recommends a debt-to-income ratio of no more than 41%, although there are exceptions for those with additional sources of income or stellar payment history.

To be eligible, the property also must meet the minimum property standards of the VA, including that the property is structurally sound, safe and sanitary.

Cost to refinance VA loan

Each VA refinance has associated closing costs. There's generally no down payment required and no need for private mortgage insurance, but there are other fees.

• Funding fees: The VA loan funding fee, which is a percentage of the loan value, is required for most VA refinances or loans. The fee is paid at closing. It ranges from 1.4% to 3.6% and is lower if it's your first VA loan or if you're making a down payment of more than 5%.

  There are some instances where the loan funding fee will be waived, including when the service member is being compensated for a service-related disability or has received a Purple Heart. For a streamline refinance, the funding fee is always 0.5%.

• Other closing costs: In most cases, closing costs for a VA refinance are similar to a conventional loan refinance. The VA limits lenders to a 1% flat charge for items that can’t be charged as itemized fees. The VA also stipulates that the lender cannot charge the borrower for attorney or brokerage fees or prepayment penalties. Fees you might pay at closing include:
  • VA appraisal fee
  • Title examination and title insurance
  • Survey fee
  • Credit reports
  • Prepaid taxes and insurance
  • MERS fee
  • Recording fees
  • Discount points

Benefits of refinancing a VA Loan

In 2020, the VA guaranteed over a million home loans. Many service members might choose to refinance at some point. There are many benefits to refinancing with a VA loan, including:

• No prepayment penalty
• Lower interest rates than other home loans
• No private mortgage insurance
• No down payment
• Ability to transfer loans to other VA eligible buyers
• Traditional closing costs can be rolled into the loan amount
• Low closing costs

Keep in mind, there are also some potential drawbacks of VA loans refinancing. You could increase the amount of money you will pay over the life of the loan if you extend the loan term or increase your payment if you shorten the term.

Bottom line: Is refinancing a VA loan a good idea?

Refinancing a VA loan has many benefits. It might offer you the chance to lower your interest rate, lower your monthly payment, change to a fixed interest rate or cash out on home equity.

Before you refinance a home loan, it's important to look at the pros and cons, including factors like increasing the term length of your loan, which leads to more payment of interest over time. Because each VA refinance loan has its own specific criteria, it’s smart to research lenders and find a program you're comfortable with.